Some colleges appear too big to fail, report argues

If these colleges went under, taxpayers could be on the hook for billions of dollars

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JillianBerman

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Are some colleges too big to fail? Union officials and consumer advocates are raising that question this week as the government seeks comment on proposed rules to better protect students and taxpayers if a school collapses.

Sixteen for-profit colleges identified as financially troubled by the Department of Education received at least $60 million in federal financial aid funds, last year, according to a report released Wednesday by the American Federation of Teachers. But most of those schools were required to post a letter of credit — essentially proof that the schools have the money to cover any wind-down costs if they collapse — worth just 10% to 15% of the aid they received during the most recent fiscal year.

Department officials should be requiring schools at risk of shutting down to prove they have more money in case of collapse, said Chris Hicks, an independent researcher and one of the authors of the report. He argues the government is shying away from regulating the schools in this way out of concern that the request will put the schools on such shaky financial ground that they’ll have to shut down, leaving taxpayers on the hook for potentially billions of dollars.

“Everybody understands that there’s a huge problem here and everybody understands that these institutions — because they are not being effectively regulated — are continuing to drift towards disaster,” Angus Johnston, a historian at the Hostos Community College branch of the City University of New York, and a co-author of the study, said on a conference call with reporters.

The Department of Education didn’t immediately respond to a request for comment on the report.

If a school closes unexpectedly, students with federal student loans are eligible to have them wiped away in many cases. What’s more, students who believe they were duped by their school are also eligible for loan forgiveness through a legal tool called defense to repayment, which borrowers are increasingly taking advantage of. If a school collapses under unseemly circumstances and current and former students clamor for debt relief, taxpayers could be on the hook for the bill.

Corinthian Colleges, once one of the largest for-profit college chains, filed for bankruptcy last year, leading thousands of former students to apply for debt relief. If every student who attended the school since 2010 received loan forgiveness, it would cost up to $3.5 billion, the Department has said.

A letter of credit with a higher threshold would require a school to have more money available to cover wind-down costs, which has the potential to save taxpayers money in the event of a shut down. In the wake of Corinthian’s collapse, the Department began developing rules to clarify how and when borrowers can have their federal loans forgiven under defense to repayment if they believe they were victims of fraud. The agency released its proposed rules earlier this month and is now seeking comment on them. The proposed rules include a provision that would require schools to post letters of credit of at least 10% of their financial aid funds after certain triggering events, such as lawsuits from state law-enforcement officials, federal agencies or whistleblowers.

Corinthian faced a number of these probes in the lead up to its collapse. In one, documents unsealed as part of a whistleblower case last week, allege that the school illegally paid staffers based on how many students they could enroll.

Some of the for-profit schools receiving more than $60 million a year in aid have also faced suits from federal agencies and states attorneys general. Requiring schools to post letters of credit worth 10% of their financial aid funds from the previous fiscal year in case of these events isn’t enough, Hicks said. Instead, the report argues that a working group made up of members of various federal agencies, including the Department of Education and Consumer Financial Protection Bureau as well as states attorneys general, recommend when a triggering event might require a school to post a letter of credit with a higher threshold.

The Department of Education already appears to be requiring more from schools facing scrutiny. Earlier this month, the Department asked ITT Educational Institutes to post a letter of credit worth 20% of the amount in federal financial aid it received in the most recent fiscal year, after the school’s accreditor, the Accrediting Council for Independent Colleges and Schools, asked it to prove why it should maintain its accreditation. ITT officials wrote in a recent regulatory filing that the company is currently “assessing the new requirement,” from the Department. An official from the school previously said ACICS took action under “extreme political pressure.”

The agency could do more to address its “failure of oversight,” and “better protect students and taxpayers,” Randi Weingarten, the president of the AFT, said on the conference call. But she added that the Department’s proposed rules on defense to repayment are a step in the right direction. “The Department has the opportunity to stop treating predatory colleges as if they are too big to fail and that is in some ways what this report is about,” she said.

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